Libra: Facebook’s cryptocurrency

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Libra: Facebook’s cryptocurrency

Why in news?

  • On June 18, 2019, Facebook announced that it is going to launch a global digital currency by the first half of 2020. The currency has been named Libra.
  • It will be run by the Libra Association, a Geneva-based entity that has over two dozen founding partners, including Facebook, Mastercard, Visa, Uber and the Vodafone group.

What is Libra?

  • Facebook is unveiling a digital currency called Libra as the company seeks to make its ads more valuable by enabling smoother transactions and payments online, particularly among those without credit cards or bank accounts.
  • Libra will use the same security and record-keeping principles as Bitcoin, the most popular digital currency system today.
  • But unlike Bitcoin, Libra is backed by several traditional financial companies, including PayPal, Visa and Mastercard, and will base its value on multiple real-world currencies such as the US dollar and the euro.
  • Libra also faces additional scrutiny over privacy, given Facebook’s poor record on the matter.

What’s a cryptocurrency?

  • It’s a form of digital cash that uses encryption technology to make it secure. Cryptocurrencies exist not as physical bills or coins but rather as lines of digitally signed computer code. Records are typically kept on ledgers known as blockchain.
  • People can store their cryptocurrency stashes in virtual wallets that resemble online bank accounts. Facebook is developing a wallet app for Libra; others will be able to as well.
  • As with other cryptocurrencies, people will be able to buy and sell libras on exchanges for traditional currencies. It’s not clear what fees, if any, consumers will have to pay for such transfers, although Facebook says they should be low.

Why not use Bitcoin?

  • Blockchain technology: It is true that Bitcoin and Libra are both based on block chain technology, which refers to a form of distributed ledger — not centralised — of transactions.
    • These are created by complicated math functions that make them almost incorruptible. But beyond this, there is very little in common between Bitcoin and Libra.
  • Libra is an initiative of 28 influential corporate entities.
    • Bitcoin, which the world first came to know of in 2008, is seen as a product of libertarian values. Its founder, whose identity remains a mystery to this day, is referred to as Satoshi Nakamoto.
  • Not used widely: Although Bitcoin has gotten a lot of attention, it isn’t widely used.
    • For one thing, its value fluctuates wildly, meaning that $100 in bitcoins today might be worth $300 a month from now _ or $2.50. Only a handful of merchants accept bitcoins as payments.
    • Facebook is hoping to keep the libra’s value stable by tying it closely to established currencies.
    • Unlike most other cryptocurrencies, the Libra will be backed by real-world bank deposits and government securities in a number of leading currencies.
  • Facebook is also recruiting partners ahead of time. Lyft, Uber and Spotify already have joined the Libra group.
    • They will likely accept libras when the system launches.
    • They’ll also help fund, build and govern the system.
    • That’ll make Libra less of a free-for-all than Bitcoin.
    • Facebook says Libra will embrace regulation, but it isn’t providing many details on how.
  • With most cryptocurrencies, including Bitcoin, anyone can lend computing power to verify transactions and to prevent anyone spending the same digital coin twice.
    • With Libra, the verifications will initially be managed by its founding companies, such as Facebook and PayPal. Facebook believes the closed approach will mean better security.

Are cryptocurrencies anonymous?

  • Although it’s possible to trace bitcoins and some other cryptocurrencies as they are spent, owners of accounts behind the transactions aren’t necessarily known.
    • That makes such currencies a favorite among certain cybercriminals.
    • But it is sometimes possible to tie cryptocurrency transactions to a real person who has cashed out digital coinage into a traditional currency.
  • And if someone spends libras while logged onto Facebook, it’s theoretically possible Facebook could tie it back to a real person.
  • Facebook says it won’t use Libra data to target ads, but may share data “to keep people safe, comply with the law, and provide basic functionality.”
    • Facebook is creating a subsidiary, Calibra, to try to keep the operations separate.

How does Libra work?

  • The Libra Association — crypto’s new oligarchy
    • Facebook recruited the founding members of the Libra Association, a not-for-profit which oversees the development of the token, the reserve of real-world assets that gives it value and the governance rules of the blockchain.
    • The 28 soon-to-be founding members of the association and their industries include:
      • Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
      • Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.
      • Telecommunications: Iliad, Vodafone Group
      • Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
      • Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
      • Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking
    • Facebook says it hopes to reach 100 founding members before the official Libra launch and it’s open to anyone that meets the requirements, including direct competitors like Google or Twitter.
    • The Libra Association is based in Geneva, Switzerland and will meet biannually. The country was chosen for its neutral status and strong support for financial innovation including blockchain technology.
  • Libra governance — who gets a vote
    • Each member, including Facebook/Calibra, will only get up to one vote or 1% of the total vote (whichever is larger) in the Libra Association council.
      • This provides a level of decentralization that protects against Facebook or any other player hijacking Libra for its own gain.
      • By avoiding sole ownership and dominion over Libra, Facebook could avoid extra scrutiny from regulators who are already investigating it for a sea of privacy abuses as well as potentially anti-competitive behavior. In
    • The Libra currency — a stablecoin
      • A Libra is a unit of the Libra cryptocurrency that’s represented by a three wavy horizontal line unicode character ≋ like the dollar is represented by $.
      • The value of a Libra is meant to stay largely stable, so it’s a good medium of exchange, as merchants can be confident they won’t be paid a Libra today that’s then worth less tomorrow.
      • The Libra’s value is tied to a basket of bank deposits and short-term government securities for a slew of historically stable international currencies, including the dollar, pound, euro, Swiss franc and yen.
      • The Libra Association maintains this basket of assets and can change the balance of its composition if necessary to offset major price fluctuations in any one foreign currency so that the value of a Libra stays consistent.
      • The name Libra comes from the word for a Roman unit of weight measure. It’s trying to invoke a sense of financial freedom by playing on the French stem “Lib,” meaning free.
    • The Libra Reserve — one for one
      • Each time someone cashes in a dollar or their respective local currency, that money goes into the Libra Reserve and an equivalent value of Libra is minted and doled out to that person.
      • If someone cashes out from the Libra Association, the Libra they give back are destroyed/burned and they receive the equivalent value in their local currency back.
        • That means there’s always 100% of the value of the Libra in circulation, collateralized with real-world assets in the Libra Reserve. It never runs fractional.
        • And unliked “pegged” stable coins that are tied to a single currency like the USD, Libra maintains its own value — though that should cash out to roughly the same amount of a given currency over time.
      • The Libra Blockchain — built for speed
        • Every Libra payment is permanently written into the Libra Blockchain — a cryptographically authenticated database that acts as a public online ledger designed to handle 1,000 transactions per second.
        • That would be much faster than Bitcoin’s 7 transactions per second or Ethereum’s 15.
        • The blockchain is operated and constantly verified by founding members of the Libra Association, which each invested $10 million or more for a say in the cryptocurrency’s governance and the ability to operate a validator node.

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